Plan Fiduciaries not Required to Announce Own Stock
Sale to Participants

January 7, 2008 (PLANSPONSOR.com) - The 7th U.S.
Circuit Court of Appeals affirmed a lower court's decision
that plan fiduciaries were not obligated to tell Thrift Plan
participants that they had decided to sell their own holdings
in company stock, both within the plan and
otherwise.

In its opinion, the appellate court pointed out the
fiduciaries had disclosed the sale of their stock held
through the Thrift Plan, and also stock they were able to
acquire by exercising vested options they had received in
their roles as managers or directors of Indianapolis
Power & Light, in filings with the Securities and
Exchange Commission (SEC) and the markets. The court
noted that rank-and-file workers do not read such
filings, but investment analysts do – and the fiduciaries
had hired Merrill Lynch to provide advice to each
participant personally.

According to the ruling, the Employee Retirement
Income Security Act (ERISA) “does not hold a
fiduciary responsible for the decline in an
investment’s value, when an informed and independent
investment adviser has been furnished without charge to
all beneficiaries, who exercise full control over which
investments their accounts will hold.”

The 7
th
Circuit agreed with the district court that an ERISA
fiduciary is not obliged to strip participants of the
ability to make their own decisions, nor to disregard the
plan’s provision requiring all of the employer’s
contributions to be held as IPALCO stock.

After the district court ruled in favor of the
defendants on all claims, the plaintiffs, representing a
class of participants in the Thrift Plan, abandoned all
claims on appeal except the dispute that the fiduciaries
had to tell the participants they were selling most of
their own stock in IPALCO.

The plaintiffs accused the fiduciaries of promoting
AES Corporation, which merged with IPALCO, as a good
prospective employer (and implicitly as a good
investment) while divesting their own holdings, thereby
demonstrating their true beliefs were otherwise
(See
Indianapolis Power Employees Cry Foul
Over Co. Stock Plummet
). However, the district judge determined the fiduciaries
actually (and reasonably) believed everything they told
the participants, and sold IPALCO stock, and cashed out
their options, only because AES had announced it would
replace the management team at Indianapolis Power &
Light, leaving the fiduciaries no reason to hold company
stock.

The plaintiffs insisted that many of the
participants would have sold IPALCO as soon as they
learned of the managers’ decisions, not because the
information actually affected the stock’s value (or
suitability), but because they wanted to copy the
managers’ investment strategies as an
information-conservation device.

According to the appellate court, due to the
plaintiffs’ reasoning, “the case boils down to an
argument that an ERISA fiduciary has a duty to disclose,
directly to a pension plan’s participants, even
non-material information that may affect the participants
for reasons unrelated to the value of the
investment.”

The opinion in Joseph J. Nelson and Michael Wycoff,
on behalf of a class, v. John R. Hodowal, et. al. is
here
.